Evolution of Regulatory Compliance in Banking: A Risk-Based Approach

Embracing a New Era of Compliance

The banking industry is undergoing a significant transformation in regulatory compliance. As regulations continue to evolve, banks must adapt their approach to ensure effective risk management and oversight. The traditional siloed model of compliance is no longer sufficient; instead, banks need to adopt an integrated and risk-based approach.

Three Key Principles for Transformation

To achieve this transformation, we outline three main principles:

1. Integrate Compliance into Risk Management

Develop a single inventory of operational and compliance risks
Use standardized taxonomies to classify and prioritize risks
Coordinate assessment and remediation methodologies to ensure efficient resource allocation

By integrating compliance into risk management, banks can better identify and mitigate potential threats.

2. Transform the Compliance Function

Change the organizational structure and placement of the compliance function
Elevate its profile and position it as a risk similar to operational risk
Foster a strong risk culture within the organization

This transformation will enable compliance to take on a more proactive role in identifying and addressing risks.

3. Measure Progress and Outcomes

Apply a ten-point scorecard to measure progress on the transformation journey
Regularly assess and report on key performance indicators (KPIs)
Use data-driven insights to inform strategic decisions

By measuring progress and outcomes, banks can ensure they are on track to achieve their goals.

Key Considerations for Success

In addition to these principles, we highlight several important considerations:

Develop a clear tone from the top: Establish a strong risk culture and ensure that all stakeholders understand the importance of regulatory compliance.
Risk ownership and independent challenge by compliance: Ensure that compliance has a seat at the table and is empowered to question and challenge decisions.
Compliance operating model with shared horizontal coverage: Implement a model that covers key issues across the organization, rather than in silos.
Use quantitative metrics and specific qualitative risk markers: Measure compliance risk using data-driven approaches and qualitative factors.
Adequate talent and capabilities: Ensure that the compliance function has the necessary skills and resources to tackle key risk areas.

Challenges and Opportunities

While transformation is necessary, it also presents challenges. Banks must avoid “missing the forest for the trees” by keeping their focus on the bigger picture. Effective integration and coordination are critical to success.

However, the potential benefits of a successful transformation include:

Delivering a better quality of oversight while increasing efficiency: By integrating compliance into risk management, banks can achieve greater efficiency and effectiveness.
Reducing structural cost: A more streamlined approach to compliance can lead to cost savings.
Significant de-risking of operations: By identifying and mitigating potential risks, banks can reduce their exposure to operational threats.
Competitive advantage in the foreseeable future: Banks that adopt a risk-based approach to regulatory compliance will be better positioned for success in an increasingly complex regulatory environment.